Earnings Preview: Applied Materials (AMAT)

Applied Materials (NASDAQ:AMAT) reports earnings after close and today’s report marks the company’s fiscal-2007 year-end.  First Call puts consensus estimates for this quarter at $0.29 EPS on revenues of $2.38 Billion, while next quarter estimates are $0.27 EPS on revenues of $2.31 Billion.

At $19.04 with the stock up 2% today, this only has a P/E of 15.2.  But the problem is that earnings growth is essentially Nil.  The fiscal 2007 EPS target of $1.25 is not really different than the $1.23 EPS target for 2008, and the revenue expected for fiscal 2007 at $9.75 Billion is only about 1% from the $9.86 Billion for fiscal 2008.

So there exists a tech stock conundrum.  The stock is now back closer to the middle portion of its $17.35 to $23.00 trading range over the last year.  The good news is that the stock recently bounced off of an $18.00-ish support level.  Options traders are pricing in only a move of $0.50.  Wall Street analysts still have an average price target of $23.50 to $24.00 depending on how you calculate.

The valuations are low, but that’s because there’s no growth. It really looks like Applied Materials is going to need to communicate that it is growing its expansion into solar beyond its recent acquisitions.  They even made noise in Investors Business Daily over the solar operations.  Unfortunately that is a mere blip at the company right now.  Applied has smart executives running it, so hopefully they recognize that going out to buy growth operations may be more exciting than buying back and retiring Applied’s own shares.  Selling chip equipment to chip manufacturers has become an industry that is very far from being exciting, even for the leader in the field.

Jon C. Ogg
November 14, 2007

Jon Ogg produces the more detailed 24/7 Wall St. subscriber-based Special Situation Investing Newsletter; he does not own securities in the companies he covers.